Most of the microfinance practiced around the world involves providing working capital loans that are crucial for developing and expanding
small businesses and pulling the entrepreneurial poor up the income ladder.
While business development is important, a decent place to live becomes
paramount for any household to stay healthy, educate children and, in some
cases, to safely store inventory or run businesses too. Microfinance principles
can be extended to offer financial support to help upgrade homes or build new
homes one room at a time. In terms of business proposition for MFIs, housing
microfinance (HMF) could be a great new product to stay ahead of competition,
retain good customers and help them build assets. However, one should be aware
of the differences between conventional microfinance loan and housing
microfinance loan before venturing into offering this product.
Loan size: Range from the amount similar to working capital loans to as
large as 3-4 times.
Loan term: Could range from 3 months to 5 years. Mostly 6m - 3 yrs.
Security: Mostly unsecured, similar to working capital loans. Guarantees
may be sought through co-signers or cash collateral.
Methodology: Group as well as individual. Larger size loans are
typically offered to individual clients directly.
Pricing: Interest rate expected to be lower than working capital loans,
particularly for larger loans.
Appraisal: A reasonable understanding of housing related costs and techniques is
Utility connections: 3-6 months
Sanitation, minor repairs: 6-12 months
Renovations, rehabs: 12-36 months
Incremental build, extensions: 24-60 months
Constraints: Major constraints are long term capital to match underlying loans tenors, technical knowhow for effective risk assessment and secured tenure. Secured tenure becomes critical when longer term loans are used to build permanent structures.
Any experiences of members in piloting or scaled business would be useful to know and learn.